ARKO Corp (ARKO) Q2 2024 Earnings Call Highlights: Navigating Challenges with Strategic Initiatives

Despite a dip in same-store sales, ARKO Corp (ARKO) leverages strategic pricing and new offerings to drive margin expansion and future growth.

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Oct 09, 2024
Summary
  • Adjusted EBITDA: $83.8 million for Q2 2024, compared to $86.2 million in Q2 2023.
  • Retail Fuel Margin: $41.6 per gallon, above the $38.5 per gallon midpoint of guidance.
  • Retail Segment Operating Income: $73.8 million, compared to $77.9 million in the prior year.
  • Total Retail Merchandise Sales: Down just over 2% for the quarter.
  • Merchandise Contribution: Up 0.7%, with a margin rate expansion of 90 basis points.
  • Retail Segment Fuel Gallons: Down 3.4% compared to the prior year.
  • Same Store Merchandise Sales (excluding cigarettes): Down 4% year-over-year.
  • Same Store Transactions: Down close to 8% for the quarter.
  • Wholesale Segment Operating Income: $9.1 million, compared to $6.8 million in the prior year.
  • Fleet Segment Operating Income: $11.8 million, compared to $9.3 million in the prior year.
  • Net Income: $14.1 million for the quarter, compared to $14.5 million in the prior year.
  • Long-term Debt: $890 million, excluding lease-related financing liabilities.
  • Total Liquidity: Approximately $806 million, including $232 million in cash on hand.
  • Capital Expenditures: $19.3 million for the quarter.
  • Q3 2024 Adjusted EBITDA Guidance: $70 million to $86 million.
  • Full-Year 2024 Adjusted EBITDA Guidance: $235 million to $275 million.
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Release Date: August 06, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

  • ARKO Corp (ARKO, Financial) reported adjusted EBITDA that exceeded their second quarter guidance, reflecting effective management of pricing and vendor relationships.
  • The company achieved significant merchandise margin expansion, which helped offset a decline in same-store sales.
  • ARKO Corp (ARKO) saw a 19% increase in same-store pizza sales and a 36% increase in units sold due to their new value-oriented pizza offering.
  • The introduction of Nathan's Famous Hot Dogs in over 460 stores resulted in a 16% increase in same-store hot dog sales.
  • The company is advancing a new store design pilot aimed at enhancing customer value and improving store operations, with plans for a region-wide rollout.

Negative Points

  • ARKO Corp (ARKO) experienced lower same-store merchandise sales and retail volumes at the pump due to consumer pressure from inflation.
  • Same-store transactions were down close to 8% for the quarter, reflecting a challenging external environment.
  • Retail segment fuel gallons were down 3.4% compared to the previous year, indicating a decline in gallon demand.
  • The company reported a decrease in adjusted EBITDA to $83.8 million from $86.2 million in the previous year.
  • Same-store fuel gallon demand was down 6.6% for the quarter, highlighting ongoing challenges in fuel sales.

Q & A Highlights

Q: Can you provide an overview of the current state of procurement across ARKO's business segments and any potential opportunities?
A: Arie Kotler, Chairman, President, and CEO, explained that all procurement activities are centralized in their back office, covering retail, wholesale, and fleet segments. The company is well-positioned to leverage opportunities, and the transformation plan aims to enhance these opportunities further. Robert Giammatteo, CFO, added that while everything is on a common procurement platform, there are opportunities, particularly on the indirect side, which will be part of the transformation plan.

Q: Are there opportunities to grow the fleet card and wholesale businesses beyond ARKO's current network?
A: Arie Kotler confirmed that there are ongoing opportunities to add sites organically and through acquisitions. The company is actively looking to expand in certain areas, and while large growth typically comes from acquisitions, organic opportunities are also pursued.

Q: Can you clarify the assumptions behind ARKO's 2024 outlook, particularly regarding fuel margins and same-store sales?
A: Robert Giammatteo stated that the company expects structurally higher fuel margins, with recent months showing an increase. However, there is pressure on merchandise sales, which have been adjusted to reflect current trends. The acquisition of CBQ was factored into the outlook, but it is not a significant contributor.

Q: What are the key characteristics of stores being converted to dealer locations, and how might this affect the business mix?
A: Arie Kotler explained that the decision to convert stores is based on profitability and potential upside. The goal is to allocate capital where it can achieve better returns. The wholesale segment is strong, and the conversion aims to enhance profitability while maintaining control over fuel supply.

Q: How does ARKO plan to address the performance gap between its top-performing stores and those targeted for conversion to dealer locations?
A: Robert Giammatteo mentioned that more details will be shared at the upcoming Investor Day. The company has identified lower-performing stores for conversion to dealer locations, allowing for better capital allocation towards more profitable stores.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.